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Gold Market Update

By: Clive Maund | Sunday, December 23, 2012

originally published December 23rd, 2012.

After gold's losses of the past couple of weeks there is increasing talk about
its bullmarket being finally over. In this update we will use long-term charts
to determine whether these claims have any substance.

On its 12-year chart, which goes back to the start of the bullmarket, we can
see that the top boundary of the uptrend from 2006 is defined by the line
drawn across 3 important peaks, and it is from this line that the parallel
supporting trendline beneath is derived. While there is no law stating that
the lower trendline has to be parallel, it is nevertheless likely, and it
is regarded as no coincidence that the strong support at recent lows, which
needs to hold, and this lower trendline are more or less coincident at this
time - if the current reaction continues this is where it should stop and
reverse, although as we will see later on the 6-month chart it may not drop
back any further than where it is now.

Having gotten a perspective on the entire bullmarket, we will now look at
the action from the 2006 peak in more detail on a 7-year chart. On this chart
we can see more clearly where gold will arrive at a 'buy spot' if the current
reaction continues, in the green oval. Since the August 2011 peak, gold has
mostly been trading in a horizontal box or rectangular trading range bounded
by the clear lines of support and resistance shown. On a further dip into
this support, which will bring it close to the major supporting trendline,
gold will be a buy, and as this important support above $1500 is so clearly
defined, the point to set stops will be a little below $1500. This mechanical
approach affords a highly favorable risk/reward ratio, as positions would
be closed out for a minor loss if the support fails, while upside potential
from this entry point is obviously very considerable.

A lot of traders were upset last week when gold dropped below its early November
lows, in the process dropping below its 200-day moving average, and grumbling
about the dastardly cartel and their 'dirty tricks department' bubbled up
again. On the 6-month chart we can see recent action in detail, and it might
not be anywhere near as bad as it looks at first sight. On the contrary we
could be at a buy spot right now - for what we might just have seen is the
completing C-wave of a 3-wave A-B-C correction to the strong upleg in August
and September, which still looks like an impulse wave (advance in the direction
of the primary trend). The price has now arrived at the bottom of the parallel
channel shown and at a zone of significant support in an oversold condition.
Also, last week's selling looks rather panicky and capitulative, the sort
of thing you associate with weak hands.

The latest Hulbert Gold Sentiment, courtesy of www.sentimentrader.com shows
that the sentiment pendulum has swung from being very bullish a few months
ago, and thus a sign of a top, to getting bearish again, which increases the
chances of a reversal to the upside soon.

Gold's COT charts did call the retreat of recent weeks, with high Commercial
short and Large Spec long positions having built up ahead of it, as the latest
COT chart below shows. The chart is now less useful, as readings have moderated
into middle ground, and thus don't give much of an indication one way or the
other.

What about the dollar? - a dollar plunge would be 'just what the doctor ordered'
for gold's convalescence and swift return to ruddy cheeked health would it
not?

The dollar index chart looks dire. On its 18-month chart we can see that a
large Head-and-Shoulders top appears to be completing. While these patterns
can sometimes abort, it indicates a high probability that the dollar will
break lower soon, and if it does it can be expected to drop quite rapidly
to the next important support level in the 73.50 - 74 area. Clearly such a
drop is likely to drive a substantial rally in gold and silver. The fact that
gold and the dollar dropped together over the past week or so is regarded
as a temporary anomaly.

At the same time, the broad stockmarket look like it about to roll over and
head south. On the 15-year chart for the S&P500 index we can see how its
big bearmarket rally has been steadily decelerating as it has approached the
massive resistance at its 2000 and 2007 highs, with the uptrend approximating
to a bearish Rising Wedge, but more accurately defined by the large bearish
'Distribution Dome' shown on the chart. While the pattern could abort, with
a breakout to new highs - possible if the dollar craters - by itself this
chart points to a potentially severe decline. One horrifying possibility is
that the dollar and US stockmarket drop in tandem as the US economy, finally
overcome by its massive debt burden with the eventual threat of runaway interest
rate hikes, plunges into the abyss.

If the Head-and-Shoulders top in the US dollar were to abort, and it rallies
as a result of a 'dash to cash' as in 2008, then it is easy to see how the
US stockmarkets could then plunge, which they look set up to do. In this situation
what would happen to Precious Metals stocks, which have recently looked really
lame?

Our 5-year chart for the HUI index shows that the sector looks vulnerable
to a brutal decline if the broad stockmarket plunges, as a large potential
Head-and-Shoulders top is completing in this index. In this situation quality
junior mining stocks which have typically lost 80 - 90% of their value over
the past couple of years, might only lose another 50 - 75% of their current
value, so that a stock which has dropped from say C$2.00 to C$0.20 over the
past 2 years, might only drop to say C$0.07, where needless to say, it will
probably be a great bargain.

In conclusion it is a complex and messy picture, but at least we have the
clear parameters that are set out in this update. Gold could reverse and take
off higher from here, and is viewed as a buy on any further retreat back into
the support above $1500. Failure of the key $1500 level would be a bearish
development that would call for the closing out of positions or at least protecting
with hedges. The dollar looks set to break down, but so does the stockmarket,
which is an extraordinary situation as normally when the dollar drops, stocks
rally to compensate.

To finish on a supremely positive note, at least we survived the Mayan prophecy
for the world to end on 21st December. After that 2013 should be a cakewalk!...

The above represents the opinion and analysis of Mr. Maund,
based on data available to him, at the time of writing. Mr. Maunds opinions
are his own, and are not a recommendation or an offer to buy or sell securities.
No responsibility can be accepted for losses that may result as a consequence
of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation
of any kind from any groups, individuals or corporations mentioned in his reports.
As trading and investing in any financial markets may involve serious risk
of loss, Mr. Maund recommends that you consult with a qualified investment
advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction
and do your own due diligence and research when making any kind of a transaction
with financial ramifications.